When to retire — Prepare for an on-time arrival

Once upon a time, many companies had a mandatory retirement age for their employees. Gold watches were awarded, parties were had, good-byes were said. The next day, the company pension kicked in, the rocking chair was set out on the front porch, and life was good. For better or for worse, times have changed.

Today, retirement is more complex. Sometimes you pick when you retire. Other times, the date is picked for you — as in the “voluntary retirement” some companies offer when they cut their work force. Some people retire early, while others hang in for as long as they can. Even the definition of retirement has changed to reflect today’s more vigorous and active retirees. For many, retirement is a time to take on new challenges and discover more opportunities.

Does early retirement make sense?

Early retirement sounds good to many people. But leaving the work force early can be very difficult when you consider the financial realities.

• Savings turn into withdrawals. When you stop working, you switch from making contributions to your retirement plans to withdrawing money from those plans. The longer you can work, the more you can save.
• Retirement lasts longer. Our life expectancy rates have gone up. That means the earlier you retire, the more years you will be dependent on your savings.
• Guaranteed income may go down. Your Social Security benefits will be reduced if you start taking them before you reach the official retirement age — currently 66 for most people.
• Penalties for early withdrawal. If you are under age 59½, you will pay an IRS 10% penalty tax for IRA withdrawals unless an exception applies. Plus, you will pay income tax on the full amount of withdrawals from Traditional IRAs. On the other hand, most employer qualified plans like 401(k)s allow penalty-free withdrawals if you leave the company in the year that you turn 55 or after. You still pay income tax on the money.
• Health insurance costs can rise. Medicare doesn’t start until age 65. If you retire before then and you don’t have retiree health benefits from your employer, you may have to pay for your own individual policy.

There’s a lot to be said for staying in the work force: You can put more money into savings. The number of years you must rely on your savings for income decreases. And you’ve got more time to plan your new life.

Delaying the day

If early retirement is not in the cards, or the numbers aren't quite working out, there are several options you can consider for maximizing your retirement income.

• Work longer — And not necessarily at your old job, though that may be an option. Many retirees get satisfaction from moving into new lines of work or starting their own business. It can augment income, provide structure and allow for new opportunities. You'll probably wind up with a larger nest egg and you'll have fewer years that you'll have to use savings.
• Delay collecting Social Security — If you’re eligible for Social Security, you can start collecting benefits at age 62. But if you start taking benefits before you’ve reached your full retirement age, your monthly benefit check will be 25% to 30% less. In terms of getting the most out of Social Security, waiting longer means your monthly checks will be larger for the rest of your life.
• Manage expenses — Create a budget so you can track expenses and if need be work with a financial professional to calculate how much of your retirement income is taxable, partially taxable and income tax free. This will help you avoid overspending early in retirement, which could put you in a bind later on.
• Create a withdrawal strategy — Decide how much you can withdraw from your savings each year and prioritize withdrawals from taxable, and tax-deferred accounts.
• Be tax savvy — Combining withdrawals from tax-deferred accounts like 401(k)s and traditional IRAs with tax-advantaged accounts like Roth IRAs (in which contributions are made with after-tax money) can help you to manage your taxable income.
• Diversify — Retirement doesn’t mean you’re at the end of the line — far from it, in fact. It’s still important to make sure your investment portfolio provides the potential for some long-term growth along with seeking stability of principal.
• Tap into your nest egg — But as you start selling off investments and reinvesting, be sure to rebalance your account regularly so that it stays in line with your long-term financial goals. Remember to talk with a legal advisor and tax consultant before making investment-related decisions.
• Evaluate the cost of your home — You might have paid off your mortgage. But have you thought about how much it costs to maintain your home? How much are your property taxes? What about major repairs like a new roof or replacing the furnace? If your retirement income is falling short, maybe now’s the time to consider downsizing to a more manageable home.

Be proactive

Consult with a financial professional to help keep you on track, and continue to refine your goals and make adjustments to your retirement income strategy as the years go on. The above are just some of the ways to help your money go the distance with you.